Week 4 Flashcards
What is the difference between an merger and an acquistion?
Merger: two independent firms join to form a single firm, typical similar sized and consider each other on equal size. Name is by one of the two firms or a combination, firms’ stocks are usually retired, and new stocks may be issued
Acquisition: one firm takes over an excysting firm, can buy a share, the majority or all the stock of the target firm. The target firms typically come under the name of the acquiring firm. No stocks are issued (uitgegeven)
What is the main motive for an M&A?
Capture value: focus on short term gains rather than long term strategic benefit
- Transfers value from stakeholders to acquiring firms’ shareholders
- Focus on wealth redistribution, not new value creation (existing value)
- Financial and legal expertise and happens as a one-time transaction
Value creation: integrate value capture opportunities within broader framework to develop new capabilities and build a sustainable competitive advantage
- Combines resources and capabilities to create a more profitable entity
- Focus on long term value creation, through strategic integration.
- Require managerial actions to realize synergies
- Develops over time, resulting in sustained benefits
There are two operating synergies in M&A? Which one?
Revenue enhancing operating synergy
- Pricing power: ability to set higher prices due to increased market leverage
- Functional strengths: combining expertise in areas such as R&D, production, marketing and distribution
- Growth opportunities: expanding into faster growing or new markets
Cost reducing operating synergy
- Economies of scale: reduced per unit costs achieved by increasing the size or scale of operations
- Economies of scope: leveraging (benutten) van shared resources to offer a broader range of products and services (bank and insurance)
- Purchasing power: reduced costs through bulk purchasing and negotiating power
Name the six stages of the M&A development framework
- Strategic analysis
- Target Selection
- Due dilligence
- Negotiation
- Integration
- Outcomes
In the strategic analysis stage, we describe 5 synergy types, name and explain them? (IMRNN)
- Internal: combination of resources or capabilities that the acquiring and target firms own and control directly, not shared with another party, that jointly enhance revenues or lower costs.
- efficiency, resource-based view and capabilities - Market power: combination of assets and industry positions that give the combined firm power in competitive interactions such as eliminating or weakening a rival, increasing buying power or increasing pricing power
- Market power, industrial organization economics - Relational: enhancement of assets shared with an individual third party made possible by the combination of the acquirer and target. The third party typically has a contractual relationship with the merged firm, which could be vertical or horizontal. The combination of the acquirer and target creates the potential for improvement.
- Dyadic relationships, relational view, contracting - Network: combination of acquiring and target firms’ pre-acquisition ego networks that improves the combined firm’s structural position (e.g. centrality, structural holes status). The ego network comprises the combining firms’ direct and indirect order) ties.
- structural position, networks - Non- market: combination of the relationships of the acquirer and target
with non-market stakeholders (e.g. governments, communities, NGOs) that enhances the firm’s ability to gain legitimacy from those stakeholders.
- legitimacy, stakeholder theory, nonmarket strategy, institutional theory, social movements
In the target selection, valuation not only depends on financial valuation. What are the strategic justifications?
Strategic fit: degree to which the target firm augments or complements the parent’s strategy and thus makes identifiable contributions to the financial and nonfinancial goals of the parent.
Issue: combining distinctive competences (unique resources)
Organizational fit: match between administrative practices, cultural practices, and personnel characteristics of the target and parent firms and may directly affect how the firms can be integrated with respect to day-to-day operations once an acquisition has been made
Issue: combining operating styles and management controls systems
In the due diligence stage, you target synergies. How do you do that?
- Access private data (“opens the kimono”): operations, strategies, financials, assets, IP, employees
- Identify hidden challenges, uncertainties and potential issues
- Compile and analyze findings to assess synergy value
- Determining the financial value of the target
(A critical yet complex step in the due diligence process)
The valuation of the target, can be based on different methods. Which one?
- Asset seeking valuation: focus on assets and liability
- Market-based valuation: focus on stock exchange and market value
- Cash flow: valuation based on projected future cashflows
What is the goal in the next stage? And what are the key considerations?
Goal: construct a fair price
Key considerations
- Price analysis: evaluate benefits (profit + synergies) Vs. costs (purchase value + premium + integration)
- Payment options:
Cash: direct payment to target shareholders–>pay target shareholders directly in cash
stock: shares offered to target shareholders –>acquiring firm offers its own shares - Deal attitude
Friendly: target firm agrees
Hostile: target firm resist
A target firm can resit. It can make the shares less attractive, how?
- by increasing the acquisition costs (poison pills)
- use supermajority vote which requires higher shareholder approval
- use staggered boards which extend the takeover timeline
- use white knights: seek a friendlier buyer or selling crown jewels: divest key assets
